Why Do Banks Favor Employee-Friendly Firms? A Stakeholder–Screening Perspective

Organization Science, Forthcoming

42 Pages Posted: 21 Dec 2014 Last revised: 1 May 2020

See all articles by Cuili Qian

Cuili Qian

University of Texas at Dallas

Donal Crilly

London Business School - Department of Strategic & International Management

Ke Wang

University of Alberta - School of Business

Zheng Wang

City University of Hong Kong

Date Written: May 1, 2020

Abstract

We investigate why employee-friendly firms often benefit from lower costs of debt financing. We theorize that banks use employee treatment as a screen to assess firms’ trustworthiness, which encompasses not only confidence in firms’ ability to perform well but also the belief that they will act with good intent towards their creditors. We integrate screening theory and stakeholder theory to explain the—oftentimes unintended—consequences that firms’ actions towards employees have on their relationships with other stakeholders. An analysis of U.S. firms between 2003 and 2010 shows that favorable employee treatment reduces the cost of bank loans, and this relationship is stronger when banks cannot infer firms’ intent from their relations with stakeholders other than employees. A policy capturing study provides further support that employee treatment serves as a screen for intent. We discuss the implications of our stakeholder–screening perspective as a novel way to understand the second-order, unintended effects of a focal stakeholder relationship on firms’ relations with other stakeholders.

Keywords: employee treatment, stakeholder relations, screening theory, bank loans, credit risk

Suggested Citation

Qian, Cuili and Crilly, Donal and Wang, Ke and Wang, Zheng, Why Do Banks Favor Employee-Friendly Firms? A Stakeholder–Screening Perspective (May 1, 2020). Organization Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2540335 or http://dx.doi.org/10.2139/ssrn.2540335

Cuili Qian

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Donal Crilly

London Business School - Department of Strategic & International Management ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Ke Wang (Contact Author)

University of Alberta - School of Business ( email )

3-23 Business Building
Edmonton, Alberta T6G 2R6
Canada
+1 780-492-1630 (Phone)

Zheng Wang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
136
Abstract Views
938
rank
268,096
PlumX Metrics